Dec 2018-Jan 2019

CALASTONE EVENT: Australia re-examined

Calastone_event_Sydney_2018Fund passports, home bias and the merits of regulation were among the topics discussed in the second annual Australia report carried out by Funds Global Asia in partnership with Calastone. In some ways, Australia’s funds industry is the envy of the world. Thanks to mandatory contributions, the country’s superannuation schemes are well-established and well-funded. Not only that, but Australia has enjoyed one of the most remarkable growth streaks on record – it is now 27 years since the economy was in recession. Yet there are signs of trouble in this investment paradise. The Royal Commission, an investigation into alleged malpractice in the investment and wealth management industries, has generated significant negative press coverage. Investors, who were not aware of quite how many intermediaries were enjoying commissions and trail fees on their investments, are demanding more transparency and fairness. Elsewhere, some economists fear that Australian equities – similar to equities in many other developed countries – are overvalued and due for a correction. Against this background, Funds Global Asia prepared a survey of Australian funds professionals to present at a conference in Sydney organised in partnership with Calastone. The Australian poll sought to address some of the key issues facing the local funds market as it prepares for a volatile future. This was the second year that Funds Global Asia conducted a research project of this kind, which meant trend data spanning 2017 and 2018 was available (the research is available online). Going abroad
Given the exceptional growth record of the Australian economy, it is perhaps no surprise that Australian investors exhibit a significant home bias in their investment choices. A high allocation to domestic equities has rewarded investors handsomely in the past decade. Why change a winning formula? The answer is that over-allocation to any one market is a source of risk. A slowdown or recession in Australia would cause havoc with local investors’ portfolios, assuming they were not diversified. We wanted to gauge our respondents’ views on this point and asked if they thought it was important for Australian investors to diversify their exposure to managed funds that invest abroad. The answer was strongly positive. A total of 94% of investors agreed that diversification was important (of which 50% held the view strongly). Why, then, are overseas allocations still so low, relative to elsewhere? We asked our respondents to select the single main factor that they thought was most significant in preventing Australian investors from increasing their allocations to managed funds that invest abroad. The most popular response was “lack of education”, which was chosen by 58% of respondents. This factor was the most popular last year, too. It was much more likely to be chosen than factors such as “tax or regulatory issues” or “not enough products on offer”. Clearly, our respondents feel that greater investor awareness of fund products and investment methods would be in investors’ interests. Passport choices
As mentioned, Australian investors tend to allocate a large proportion of their assets to their home market, and this preference for domestic products is reflected in their choice of fund vehicles, which are most commonly domestic structures. Might this change? As in last year’s survey, respondents were asked if they thought Ucits would become an important part of the product mix in Asia. Respondents were divided on this question. Less than half were confident that Ucits would be an important part of the mix while the same proportion (44%) were neutral. However, these results represented a notable change compared with last year, when only 30% said they agreed that Ucits would be an important fund structure in Australia. A rise of 14 percentage points in the total of people who had faith in Ucits seems to be a noteworthy finding. What might explain it? One possibility is presented by the following finding in the report. When asked if they believed initiatives such as the Asia Region Funds Passport (ARFP) would be significant in increasing Australian investors’ international exposure, our respondents indicated a greater level of scepticism this year than they did in 2017. In total, a quarter of respondents disagreed that initiatives such as the ARFP would be significant in this respect, compared with 13% who said they same last year. Why has the level of scepticism about ARFP grown in the past year? One possibility is that funds professionals in Australia have become frustrated by the relatively slow pace at which the ARFP is developing. For several years now, the funds industry in Asia has looked ahead with enthusiasm to the launch of the ARFP, but difficulties in negotiating the highly complex, multilateral agreements that will facilitate the launch of the passport has held back progress. Some of these difficulties were covered by the following question, which asked respondents to say which of a list of factors was the greatest challenge facing the ARFP. “Lack of agreement on tax” was the second-most popular choice, accounting for 22% of respondents. Respondents here have identified one of the main technical problems facing the ARFP, which is that certain participating countries treat domestic and foreign funds differently for tax purposes, which would appear to prevent a level playing field. However, the most popular choice was not technical. “Lack of awareness” was chosen by exactly half the respondents to this question. The view here is that, regardless of how or when it is implemented, the ARFP will not be a success unless investors understand what it is and how it might benefit them. Unanimity
There was at least one question where Australian respondents were (almost) all in agreement. When asked if they supported regulatory action to improve transparency in the Australian funds industry, 97% of respondents said they did support it. Given the current media focus on the Royal Commission and the accompanying commitments from the wealth and asset management industries to reform their practices, it is perhaps no surprise that respondents were unwilling to be publicly hostile to regulatory efforts, even in an anonymous poll. Future research might examine whether this high level of support for regulators’ transparency ambitions is shared in other markets or is unique to Australia. Panels and talks
The survey presentation was followed by a number of stimulating talks and discussions at the conference. Among the speakers was Brian Parker, chief economist at Sunsuper, who gave a witty overview of the global economy in which he accused US president Donald Trump of being ignorant to the complexity of world trade. Later, Simon Hoyle, a former journalist who is now head of market insight at the consultancy CoreData, explained how the Royal Commission has impacted Australian citizens’ faith – or lack of it – in their financial services providers.
Peter Williams, chief edge officer at Deloitte in Australia, gave a high-energy perspective on technology, including observations of which fintech firms are likely to be successful as well as cutting criticisms for certain incumbent firms, which he accused of being inert and complacent. Elsewhere, two sets of panellists explored the issue of technology as it affects the funds industry and Vince Lucey, managing director for innovation and change at Calastone, explained his firm’s efforts to implement distributed ledger technology to improve efficiency in settlement and fund order routing. The final session of the main conference was an interview with Greg Cooper, the chief executive of Schroders in Australia, who shared his views on what the industry must do to sustain and regain investor trust. ©2019 funds global asia

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